Ethical Issues in the Tripartite Relationship

Brian S. Jones

OverviewThe Tripartite Relationship

Who Is The Client?

Guidelines

Billing

Privilege

Independent Counsel

The Tripartite Relationship

Unique to insurance defense context

Insurer must defend insured

Insurer retains lawyer to defend insured

Lawyer defends insured’s interests, but is paid by the insurer

Insurer

Defense Counsel Insured

Duty of G

ood FaithRe

porti

ng R

equir

emen

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Duty of Loyalty

Competing Interests

INSURER:

Resolve litigation as quickly and cheaply as possible

Obtain information pertaining to coverage

Avoid exposure to bad faith

INSURED:

Obtain as much coverage as possible

Avoid liability

Make the case go away

DEFENSE COUNSEL:

Defend insured’s interests

Fulfill ethical obligations

Get paid in full for work performed

Who Is The Client?

Lawyer’s duties are always only to the insured…

…right?

Cincinnati Ins. Co. v. WillisStill leading Indiana case on duties owed in tripartite relationship

Famously approved of insurer’s in-house counsel and “captive” firms defending insureds

Detailed discussion of tripartite relationship

Court noted “extensive debate…as to whom the attorney represents in [the tripartite relationship].”

Debate was “whether only the insured or both the insured and the insurer should be viewed as the client.”

“[It is] unrealistic to ignore the client relationship with both. Joint representation may become problematic, particularly if issues of disclosure of confidences arise. For example, the attorney may gain information from the policyholder-client that may affect the insurer client’s coverage obligation. But that is no basis for prohibiting the arrangement in all cases. Whatever issues joint representation raises appear to be wholly independent of the attorney’s status as an employee of the insurer or a member of a law firm. Second, there is nothing inherently wrong in common representation of two parties where their interests are aligned. Professional Conduct Rule 1.7 provides direction “[w]hen representation of multiple clients in a single matter is undertaken....” In this respect, the insured and insurer present no qualitatively different situation from any other pair of commonly represented clients.”

In Indiana, both insurer and insured are clients of the lawyer…

…when everything is going well.

But what happens when problems arise?

Interest of Person Paying for a Lawyer’s Service

[13] A lawyer may be paid from a source other than the client, including a co-client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer’s duty of loyalty or independent judgment to the client. See Rule 1.8(f). If acceptance of the payment from any other source presents a significant risk that the lawyer's representation of the client will be materially limited by the lawyer's own interest in accommodating the person paying the lawyer's fee or by the lawyer's responsibilities to a payer who is also a co-client, then the lawyer must comply with the requirements of paragraph (b) before accepting the representation, including determining whether the conflict is consentable and, if so, that the client has adequate information about the material risks of the representation.

Siebert Oxidermo, Inc. v. Shields

Default judgment case; multiple attempts to set aside default

One basis was alleged misconduct of carrier’s attorney, which was representing defendant

Company complained its lawyer was employed by the carrier

Company alleged lawyer had incentive to not zealously defend

Supreme Court adopted Court of Appeals ruling

“[W]e point out that on a daily basis defense attorneys employed by insurance carriers on behalf of policyholders are called upon to deal with matters in litigation where the interests of the policyholder and the carrier do not fully coincide. Under such circumstances the attorney's duty is, of course, to the insured whom he has been employed to represent. In response the defense bar has exhibited no inability to fully comply with both the letter and the spirit of Canon 5 of the Code of Professional Responsibility. If it were otherwise we suspect the desirability of requiring carriers to supply defense counsel would have long since disappeared as a term of the policy.”

So, both the insurer and insured are clients, but your duty is, “of course,” to the insured when problems arise.

Insurer Litigation Guidelines

Insurer litigation guidelines were created to control what defense counsel does

Late 90s: Legal Ethics Committee reviewed some of the then-prevailing guidelines

identify reimbursable expenses, hourly fees for various levels of professionals, and permitted activities by each group. It is required that defense counsel employ a “team” approach in defending a given insured, which team includes a senior litigator, an associate, and a paralegal/law clerk. Unless otherwise approved by the carrier, the senior litigator is solely responsible for the actual trial of a given case.

Regardless of which member of the team actually provides a given legal service, only the hourly rate applicable to the least skilled professional who could have handled such matter will be paid by the carrier. Further, when two or more members of the team confer about a given legal matter, a charge for the services may be made only by the attorney assigned to the matter, unless approved by the claims representative of the carrier in advance, even though the contract recites that conferences and strategy sessions may be necessary upon occasion. The preparation of intra-office memoranda is not regarded as a billable service.

The carrier expects that to the extent appropriate for the matter at hand, paralegals, junior associates and/or law clerks will perform any necessary legal research. “Repetitious revisions” of documents and proofreading will not be compensated. Organizing and indexing medical records (to be obtained in most cases only by the carrier) are defined as non-billable clerical services. Review and summarization of medical records (including records produced in medical malpractice litigation) is to be conducted by paralegals. Time required to travel within the attorney’s assigned geographic territory may not be billed, and travel time outside the territory may be billed only at a substantially reduced rate.

In its review of statements for services, the carrier will not pay for legal services that do not comply with the guidelines. Rather than making a partial payment, the entire invoice will be returned to defense counsel unpaid until there is compliance with the prescribed detailed format and/or the “proper documentation” is supplied.

The guidelines further recite that should any situation arise that raises ethics-related questions during the course of the relationship between the carrier and the defense counsel, counsel’s concerns should be expressed directly to the Senior Vice President, Claims.

Guidelines that result in “material disincentives to perform those tasks which, in the lawyer’s professional judgment, are reasonable and necessary to the defense of the insured” are “ethically unacceptable.”

“Ethically impermissible:” Guideline that prohibited another associate from being assigned to work on the file until approved impaired “the responsible attorney’s exercise of professional judgment as to the assignment of the most effective member of the litigation team to a given task.”

Guideline that appeared to require that the lawyer rely upon legal research by an unsupervised paralegal “invites legal malpractice—a breach of counsel’s duty to the insured—and is intolerable.”

Some good news: the days of the truly draconian guidelines appear to be behind us.

Billing

Late 90s: Legal Ethics Committee ruled that defense counsel can’t disclose bills to insurer’s outside auditors if bills contained confidential or privileged information

Pro Tip: Don’t put confidential or privileged information in bills

Assume that all bills will be made public

Modern Problems: Billing Review Software

Many corporate clients now require bills to be submitted electronically

Software reviews bills for compliance

Lawyers alter way time is billed to ensure entries aren’t rejected

Privilege

Richey v. Chappell

Court of Appeals: required insurer to produce statement made by the insured to the insurer five days after auto accident

Supreme Court: Reversed based on concerns about relationship between insurer and insured

One of the primary duties placed upon insurers by the issuance of a liability insurance policy is the obligation to defend claims filed by third persons against the insured. In order to effectively defend the claim, the insured must be questioned about sensitive matters which may be embarrassing, incriminating, or detrimental to the insured. The failure to cooperate may invalidate coverage…and even an insured's constitutional right against self-incrimination may not override the insured's duty to cooperate with the insurance company. In connection with its obligation to defend claims, the insurance company retains an attorney, not usually of the insured's own choosing, to represent the insured. Statements from the insured are then used by the attorney to assist in the defense of the insured, just as statements given by plaintiffs to their own attorneys are used to assist in the prosecution. Uncertainty about whether the insured's statements are discoverable gives rise to a conflict about whether a statement should be given at all, and undermines what should be a cooperative relationship among the insured, insurer and attorney. An insured's relationship to the insurance company requires full disclosure by the insured without fear that the statement may be later obtained by the claimant.

So, "where the policy of insurance requires the insurer to defend claims against the insured, statements from the insured to the insurer concerning an occurrence which may be made the basis of a claim by a third party are protected from disclosure."

This makes Indiana somewhat unique.

Independent Counsel

Usually arises when insurer reserves rights

Where claims outside of policy, Indiana gives insurers two options:

1. File dec action

2. Hire independent counsel and defend under reservation of rights

Armstrong Cleaners, Inc. v. Erie Ins. Exchange

Erie defended pollution claim under reservation of rights

Denied request for independent counsel

“[N]ot every reservation of rights poses a conflict for defense counsel. If the coverage dispute turns on issues that are independent of the issues in the underlying lawsuit, one lawyer selected by the insurer can handle the underlying litigation, and the insured and insurer can resolve the coverage dispute separately.”

[W]hether the potential conflict of interest is sufficient to require the insured's consent is a question of degree that requires some predictions about the course of the representation. If there is a reasonable possibility that the manner in which the insured is defended could affect the outcome of the insurer’s coverage dispute, then the conflict may be sufficient to require the insurer to pay for counsel of the insured's choice. Evaluating that risk requires close attention to the details of the underlying litigation. The court must then make a reasonable judgment about whether there is a significant risk that the attorney selected by the insurance company will have the representation of the insureds significantly impaired by the attorney’s relationship with the insurer.

Court was not concerned with reservation based on pollution exclusion (unenforceable in Indiana) or generic reservation based on later discovered facts

But, allocation of liability did raise conflict warranting independent counsel

"Less than vigorous defense" might strengthen Erie's coverage defense based on culpability

Takeaway: Independent counsel not required in every case

Requires examination of how litigation might play out and parties' incentives

If how insured is defended might affect coverage, more likely that independent counsel is needed

Questions

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